Partnership

A number of critical components are necessary for the creation of a partnership. They are presented here, along with brief descriptions.

1.   A Contract

A partnership is formed when two or more individuals enter into an agreement. It should be highlighted that this type of arrangement can only occur as a result of a contract, not of status. This is what distinguishes a partnership from a Hindu Undivided Family conducting family business. The reason for this is that this type of cooperation is formed solely via mutual agreement. Thus, a partnership is voluntary and contractual in nature.

A partnership relationship may form as a result of an express agreement. It may also be implied from the fact that the partners have complied with the Partnership Act and have maintained a continuous course of action, demonstrating their common understanding. This agreement may be oral or written in nature.

2.   Profit Sharing in Business

When it comes to profit sharing, two options must be examined.

To begin, a business must exist. In this context, the term 'business' refers to any trade, occupation, or profession. A business's existence is critical. A business's motivation is the "acquisition of gains," which results in the development of a partnership. Thus, no partnership may exist if there is no aim of carrying on a business and sharing the profits generated by it. For instance, co-owners who split the rent on a piece of property are not considered partners because no business exists. Likewise, no philanthropic organisation or club may be referred to be a partnership. A Joint Stock Company, on the other hand, may be floated as a partnership for non-economic reasons.

Second, there must be an agreement regarding profit sharing. For instance, A and B agree to purchase specific bales of cotton that they will sell on their joint account and split the profits equally. In this case, A and B are partners in the business they have planned. However, an agreement to share losses is not a necessary component of the analysis. However, unless otherwise agreed, damages must be borne on a profit-sharing basis.

3.   Managing a Business

The third condition for forming a partnership is that the business must be conducted by all of the partners or by one or more of the partners acting on their behalf. This is the fundamental idea underlying partnership law. A single partner's act in the course of the firm's activity is, in fact, a collective act. A business partner is both the principal and the agent for all other partners. As such, it should be underlined that the true test of a partnership is mutual agency, not profit sharing. Without the element of interactive agency, there can be no relationship. Benefit sharing is the only prima facie case that can be refuted by greater evidence. This prima facie evidence can be refuted by demonstrating the absence of mutual agency.

Individuals who have formed a partnership with another are referred to as Partners. The partners may be referred to collectively, as the name under which the business is conducted is referred to as the Firm's name. A partnership is essentially an abstract legal arrangement between two individuals. A firm is a physical thing that symbolises the collective entity of all its partners. Thus, a partnership is an invisible tie that ties the partners together, while a firm is the outward manifestation of this collaboration.

The various partner classes can be determined by the level of liability in a partnership firm.

1.   Partner who is active, actual, or ostensible

When a partner in a partnership firm becomes a partner by agreement, he or she actively participates in the partnership's operations.

The firm's partner acts as the spokesperson of the other partners for all actions taken over the course of the business's normal business lifecycle. When a partner retires, he or she must make a public notice absolving themselves of any liability for activities committed by the remaining partners following the partner's retirement.

2.   Partner Who Is Sleeping or Is Dormant

A Sleeping or Dormant Partner is a partner who is a partner by agreement but does not participate actively in the business's operations.

These partners share earnings and losses and are personally liable for the partnership firm's business. They are not, however, compelled to notify the public of their retirement from the partnership company.

3.   Nominal Collaborator

A nominal partner is an individual who signs the partnership agreement in his or her name. When this is done without a genuine interest in the firm, the individual is referred to as a nominal partner. This type of partner is not entitled to a portion of the firm's profits. This partner has made no investment in the firm and has no say in how the business is handled. However, such a partner is personally liable to third parties for all of the firm's conduct.

4.   Profitable partnership only

This is a type of partner who is entitled to a portion of the earnings but is not liable for the losses. This type of partner is only accountable to third parties for conduct committed for gain.

5.   Sub-Partner

Sub-partner is a term that refers to a partner in a partnership firm who agrees to split his profits with an outsider to the firm. A sub-partner has no claim against the firm and is not personally accountable for any debts incurred by the firm.

6.   Partners on the way

This is a partner who is admitted to an existing firm as a partner with the permission of all current partners. Such a partner is not accountable for any activities committed prior to joining the firm as a partner.

7.   Partner who is departing

An outgoing partner is a partner who departs from a partnership in which the remaining partners continue to conduct business. This type of partner remains liable to third parties for all of the firm's acts until a public notice of his retirement is made.

8.   By withholding (Section 28)

A partnership formed through holding out is often referred to as an estoppel partnership. When an individual presents himself as a partner or permits others to do so, the individual is prevented from renouncing the role he has assumed and on whose trust creditors may be thought to have acted. When an individual falsely represents himself or knowingly causes himself to be represented as a partner in a partnership firm (when he is not), he is liable in the same way as a partner in the business to anyone who gave credit to the firm on the basis of such representation.

An individual may have led people to believe they are a partner through their words or actions, or they may have permitted others to represent them as a partner. The outcome is identical in both instances.

A partnership firm is a common type of legal entity in which two individuals join forces to conduct a business for profit. We will examine the advantages and downsides of a partnership firm in this post.

The Benefits of a Partnership Firm

Several significant advantages of a partnership firm include the following:

1.   Simple to Begin

Partnership firms are among the simplest to establish. In most circumstances, the only need for establishing a partnership firm is a partnership deed. As a result, a partnership can be formed the same day. On the other side, an LLP registration would take approximately 5 to 10 working days, as the MCA must gather digital signatures, DINs, Name Approval, and Incorporation.

2.   Making Choices

Decision-making is fundamental to the operation of any organisation. Decision-making in a partnership firm may be more rapid because there is no concept of resolutions. In most circumstances, partners in a partnership firm have broad authority and can enter into any transaction on behalf of the partnership firm without the agreement of other partners.

3.   Fundraising

In comparison to a sole proprietorship, a partnership can quickly raise capital. Multiple partners enable partners to contribute in a more viable manner. Additionally, banks look partnerships more favourably when approving credit facilities than they do proprietorship firms.

4.   Ownership Sensitivity

Each partner owns and supervises their firm's operations. While their tasks may be diverse, individuals working in a partnership firm are bonded by a single goal. Ownership instils a greater feeling of accountability, laying the groundwork for a diligent staff.

The Negatives of a Partnership Firm

The following are the disadvantages of a partnership firm:

5.   Liability in perpetuity

Each partner is personally accountable for the partnership firm's losses. Each partner in a partnership firm shall be personally accountable for the liabilities caused by a partner. The LLP structure was designed by the government to minimise the responsibility of partners in a partnership firm.

6.   Members

A partnership firm may have a maximum of twenty members. There is no limit on the maximum number of partners in an LLP.

7.   Absence of a defining figure

Leadership has the potential to both elevate and ruin a business. Co-ownership eliminates the potential of leadership, and a lack of leadership results in aimless operations. On the other hand, in a partnership firm, certain partners may be named as designated partners, with additional authority and obligations.

8.   The Public's Trust

A partnership firm is straightforward to establish and does not require registration. Additionally, a partnership firm might function without much structure or regulation. As a result, it frequently breeds distrust among the general people.

9.   Dissolution Suddenly

A partnership firm would be dissolved in the event of a partner's death or insolvency. Such an abrupt breakup will have a detrimental effect on a business. On the other hand, the death of a partner does not result in the automatic dissolution of an LLP. Thus, an LLP ensures business continuation.

A partnership firm is a group of individuals who come together to conduct a business for profit. Registered or unregistered partnership firms are both possible. Unregistered partnership firms can be formed through an oral agreement or through the execution of a written agreement. A registered partnership, on the other hand, must be formed via a Partnership Deed that is registered with the Registrar of Firms. This article discusses the procedure of opening a bank account for a partnership firm in India.

Firm of Partnership Standards for Know-Your-Customer

The Reserve Bank of India establishes Know Your Customer (KYC) standards, which govern how banks collect evidence for account establishment. The RBI's Know Your Customer (KYC) guidelines provide the following standards for opening a bank account for a Partnership Firm:

·         Partnership deed, if registered; Power of Attorney provided to a partner or employee of the firm to transact business on the firm's behalf;

·         Any legally enforceable document that identifies the partners and the individuals who hold the Power of Attorney, as well as their addresses;

·         Telephone bill under the firm's/partners' name

Documents Required to Open a Bank Account for a Partnership Firm

Banks have implemented procedures and documentation to open a bank account for a partnership firm in accordance with the RBI's KYC standards. The following documents are required:

IMPORTANT Documents

• PAN Card in the Name of the Partnership Deed

• Address Identification of the Partnership Firm Evidence of all Partners

• Certificate of Registration for a Partnership (if Registered Partnership)

• Initial Entity Validation (Any one of the following documents)

• Any certificate issued in the name of an entity/firm by a local/state/central government/government agency/SEBI/IRDA/ICAI/ICSI/ICWAI/Office of the Registrar of Newspapers for India for registration/operations/trade license/business. For instance, sales tax, TIN/VAT/TAN, and so forth.

• Certificate of Professional Tax Registration/APMC/Mandi License/Certificate of Labour License/Certificate of Professional Tax Registration

• Certificate of Trademark Registration

• Certificate of Liquor Licensing/Registration

• The Excise and Customs Department issues a Certificate of Registration for Drug Licenses.

• License/Certificate to Sell/Stock/Exhibit for Sale/Distribute Insecticide/Pesticide Registration Certificate granted by the Police Department pursuant to the Weights and Measurement Act Permission/License/Certificate

• Permit/Registration Certificate Consent to Operate document provided by the State/Central Pollution Control Board Sales Tax Registration Certificate/TIN Certificate/VAT Certificate/Service Tax Certificate/TAN Certificate

• Valid Certificate of Shops and Establishments/Trade License. Validity may be extended up to the grace time specified in the certificate for renewal.

• Certificates issued by SEZ, STP, EHTP, DTA, and EPZ in the entity's name and referencing the assigned address.

• Certificate of Importer–Exporter Code and PAN Card (if PAN is quoted on the IEC Certificate).

• Certificate of Gram Panchayat (should be on letterhead and not more than 3 month old).

• Trade License under the entity's name.

• Certificate – Acknowledgement Part –II issued by the District Industries Centre (DIC)/ Small Scale Industries (SSI) with the Entrepreneur's Memorandum Number. The issuing authority's stamp and signature are included.

• Certificate of Factory Registration in the entity's name.

• SEBI Registration Certificate issued in the entity's name.

• Municipal Corporation issued a certificate of enlistment/license/letter of allotment for a shop (Kolkatta, Ludhiana and others).

• Certificates for Shops and Establishments issued by E-Seva Kendra's (Andhra Pradesh). Receipts issued by Municipal Corporation of Hyderabad (MCH) are the only ones that will be accepted in conjunction with the Shops & Establishment Certificate.

• The Municipal Corporations of West Bengal provide Shops and Establishment Certificates that are valid till March 31 of each year.

• Proof of a Second Entity (Any one of the following documents)

• Employee Provident Fund Organization registration of the business.

• Employee State Insurance Corporation registration of the business.

• Letter or Certificate (must be on letterhead and not older than three months) verifying the existence of the business issued by the Chairman/ President/ CEO/ Head of the Nagar Panchayat/ Parishad, not by local councillors/ corporators.

• Complete sales tax return in the firm's name with all required acknowledgments.

• Nota bene: The accepting authority should recognise the section of the sales tax return that contains the firm's name.

• The most recent Income/Wealth Tax Assessment order in the firm's name.

• Electricity bill that is no more than three months old.

• A copy of the most recent telephone bill received from the telecom operator, no more than three months old.

• Municipal Corporation/Local Self Government Bodies gave a certificate certifying the firm's address.

• True copy of the entity's gas connection book, together with a recent gas receipt that is no more than three months old, or a gas bill in the case of a pipe connection.

• Water Tax bills paid to Municipalities/ Corporations that are less than six months old, along with the tax receipt, should be in the firm's name.

• Property tax bills should be no more than one calendar year old from the date of issuance, and should be accompanied by tax receipts for property tax paid to Municipal Bodies / Corporations. The tax receipt should bear the firm's name.

• Certificate of Verification issued under the Weights and Measures Act–This document will be disregarded if the Registration Certificate issued under the same act is used as the proof of the first entity.